Shares of apparel company Lululemon Athletica (NASDAQ:LULU) tanked on Friday following the release of its most recent earnings report. For the third quarter, the company's revenue totaled $1.9 billion and rose 28% year over year. Comparable-store sales rose by 14% but that was well below the more than 19% that analysts were expecting. The company's forecast for the fourth quarter was also on the light side of things, with Lululemon projecting revenue of between $2.605 billion and $2.655 billion. However, net income in Q3 totaled $255.5 million and rose by 36% year over year.
But one item that has gotten investors concerned is Lululemon's rising inventory. At $1.7 billion as of the end of October, that's now 85% higher than the $943.9 million in inventory it reported a year earlier. With a significant increase in inventory, that increases holding costs and also means that the company may need to offer discounts and aggressive promotions to help move inventory. Many retailers have been struggling with these problems this year and Lululemon is proving to be no exception to that.
The problem is that if the business isn't firing on all cylinders, it can be tough to justify Lululemon's premium. The stock is trading at more than 40 times earnings, which is a steep multiple to be paying for a business that could be facing some significant challenges ahead, especially with its soaring inventory levels.
Shares of Lululemon are now down around 17% for the year. And the danger for investors is that the stock could sink even lower if things don't get any better soon.
